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Highlights of the Midwest ISO 2003 State of the Market Report

Highlights of the Midwest ISO 2003 State of the Market Report. Prepared by: Independent Market Monitor Midwest ISO April 2004. Introduction.

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Highlights of the Midwest ISO 2003 State of the Market Report

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  1. Highlights of the Midwest ISO2003 State of the Market Report Prepared by: Independent Market Monitor Midwest ISO April 2004

  2. Introduction • The Midwest ISO currently provides transmission service and is the reliability coordinator for the region, but does not yet operate centralized spot markets for energy or ancillary services. • Hence, the report evaluates the transmission service and operations, and the bilateral market outcomes in 2003. • The report contains an assessment of the current market conditions and characteristics in anticipation of the markets to be implemented by Dec-04. • The areas in the report include: • Characteristics of the Midwest Supply and Demand; • Wholesale Market Prices; • Transmission Service; • Transmission Operations; • Market Power Issues; and • Market Development.

  3. Wholesale Electricity Prices • The following figure shows price trends in the bilateral electricity markets during 2003, as well as trends in fuel prices during the year. • The prices shown are prices associated with day-ahead forward contracts for delivery at the Cinergy Hub. • Prices were substantially higher in peak hours than off-peak hours, and higher during the higher load conditions in the summer as expected. • Natural gas prices peaked early in the year, which caused the highest monthly average prices to occur in February in 2003. • Natural gas costs have a much greater effect on peak prices because gas-fired resources are frequently on the margin during peak hours and typically not economic during off-peak hours.

  4. Monthly Average Electricity and Fuel Prices Cinergy Day-Ahead Electricity Prices -- 2003

  5. Change in Resources, Load, and Resource Margin • The following figure show the quantities by fuel type in each sub-region within MISO, as well as the resource margin for the sub-regions. • From 2002 to 2003, peak load grew by 3800 and total resources increased by 3200 MW, resulting in a slight decrease in the overall resource margin. • The overall resource margin in the MISO is 22.9 percent. • The WUMS sub-region has the lowest resource margin at 16.4 percent and relies most heavily on imports into the sub-region. • The figures also shows that: • Roughly half of the MISO resources are located in ECAR. • MISO and each of its sub regions relies heavily on coal-fired generation. • Close to 60% of the generation in the Midwest ISO is coal-fired. • Nuclear, Oil, and Hydro resources account for almost 25% of the resources. • Natural gas-fired generating resources are 16% of the supply in the Midwest, although they account for the majority of the new capacity.

  6. MISO Capacity by Fuel Type in the Midwest ISO Sub-Regions 25.4% Resource Margin 16.5% 29.7% 16.4% 23.4%

  7. Market Concentration in MISO Sub-regions • The table below shows the Herfindahl-Hirschman Index (HHI) for each sub-region within MISO, a measure of market concentration calculated by summing the squares of each supplier’s market share. • HHIs do not provide a definitive measure of market power, which must consider demand and network constraint factors. • The HHIs in the Midwest are higher than in other regions because the vertically integrated utilities have divested less capacity than in other regions. • In addition to having the lowest capacity margin, WUMS is the most highly concentrated of the MISO regions.

  8. Load in MISO during 2003 • The next figure shows the load duration curve for the Midwest ISO in 2003. • This curve shows the number of hours (on the x-axis) in which the load exceeds a given load level (on the y-axis). • The load duration curve exhibits the typical high peak demand in electricity markets. • The peak load is 25 percent higher than the load level at highest 5 percent load level. • This illustrates the need in any electricity market for peaking resources – more than one-fourth of the generation can be expected to run in less than 5 percent of the hours. • This indicates how critical it is for the wholesale markets to price electricity efficiently in these hours.

  9. Midwest ISO Load Duration Curve * Due to incomplete data for 2003, loads not included for Ameren, FE, NIPS, and MDU.

  10. Blackout of 2003 • A blackout occurred in the eastern interconnect on August 14, 2003 with the vast majority of the load and generation restored over the next three days. • According to the U.S.-Canada Task Force, it was caused by: a) insufficient recognition of voltage problems on the FirstEnergy system, b) inadequate monitoring of the FE network, and c) failure to manage tree growth. • The following figure shows the prices posted by Megawatt Daily and the Intercontinental Exchange (“ICE”) at the Cinergy Hub during the summer. • Prices increased by close to $7 per MWh following the blackout on August 15. • Larger increases of approximately $20 per MWh were reported for the weekend days of August 16 and 17 during the restoration process. • These increases are consistent with the uncertainty that prevailed regarding unit availability and load levels during this period. • We monitored the restoration process, including generation outages prior to and following the blackout. We did not detect any withholding of resources or other forms of price manipulation during this period.

  11. Prices During the Blackout in 2003Daily Peak Price at the Cinergy Hub

  12. Disposition of Transmission Reservation Requests • We evaluated disposition of transmission requests from February 2002 to December 2003, which is summarized in the following figure. • The volume of approved requests increased through 2002 and 2003. • Approval levels on a monthly basis ranged from 80 to 97 percent, but were significantly higher for short-term than longer-term service. • The high rate and increasing numbers of approvals in 2003 indicate that transmission has generally been available for participants, which contributes to efficient wholesale trading. • The figure shows that most confirmed are new requests, not existing service that has been “redirected” to alternate receipt or delivery points. • Nonetheless, the revenue allocation rules provide affiliates of TOs an advantage over their unaffiliated competitors by redirecting service back to their affiliates control area to retain the transmission revenue.

  13. Disposition of Reservation Requests 2002-2003

  14. Evaluation of Unconfirmed Transmission Requests • The following chart shows the total volume of unconfirmed daily firm requests during 2003. • We evaluate whether these requests may indicate “potential hoarding” of transmission using three criteria (ATC is unavailable during the trading window, requests are refused, ATC is available after the trading window). • These results show that there has not been a substantial quantity of unconfirmed requests that meet these criteria. • The tariff rules allow participants a free call option on firm transmission capacity for the period between the approval and the confirmation deadline. • This conduct can block participants’ access to firm service (whether intentional or unintentional) • Hence, we recommend the MISO consider tariff revisions to eliminate this free call on the MISO’s firm transmission.

  15. Approved and Confirmed Requests and Potential Hoarding

  16. TLR Events and Curtailments in 2003 • The next figure shows the number of TLRs by level that occurred in 2002 to 2003 and the quantity of transactions curtailed. The TLR levels include: • Level 3 – non-firm curtailments. • Level 4 – commitment or redispatch of specific resources. • Level 5 – curtailment of firm transactions. • The TLRs called on Midwest ISO flowgates (level 3 and above) account for 62 percent of all TLRs called in the eastern interconnect • This is not surprising since much of the eastern interconnect relies on centralized redispatch to manage congestion rather than TLRs. • The figure shows that the curtailment quantities have increased significantly from 2002 as the number of TLR events has increased. • Most of the increase (particularly of level 5 TLRs) is related to imports into the Upper Peninsula of Michigan, caused by a large unit outage in Michigan. • A substantial increase also occurred in Iowa, due in part to poor hydro conditions in Manitoba cause significant shifts in regional power flows.

  17. TLR Events and Transactions Curtailed 2002 to 2003

  18. TLR Events and Curtailments in 2003 • The next analysis evaluates the TLR calls by the Midwest ISO in 2003 by examining the flowgate flows in hours when TLRs were called. • The following figure shows the distribution of the over and under-curtailments during 2003. • Over-curtailment = curtailments that cause the flow to be less than 95% of the limit (this is the target for the TLR curtailments). • Under-curtailment = additional relief necessary to reduce flows to the limit. • This figure shows that: • Almost 40 percent of the curtailments are accurate, with over or under-curtailments of less than 1 percent of the flowgate limit; • The bulk of the curtailments (86%) are in the range of 5 percent over-curtailment to 5 percent under-curtailment. • The mean value is a 1.3 percent over-curtailment. • These results are positive considering the uncertainties inherent in the TLR process.

  19. Distribution of Over and Under-Curtailments During TLR Events in 2003

  20. The TLR Process and Market Efficiency Although the MISO has managed the process well, TLRs are not an efficient means to manage congestion. The Report contains three important findings: • The TLR curtailment quantities were more than three times larger on average than the potential redispatch amounts. • Centralized redispatch, such as proposed under MISO’s energy markets, will select the most effective generators to redispatch. • The current bilateral energy markets do not accurately reflect congestion occurring on the system in general. • Improved accuracy and transparency of the price signals under the MISO energy markets will provide significant benefits. • The proposed energy markets will also increase the utilization of the transmission network and promote reliability. • The real-time redispatch (every 5 minutes) will allow interfaces to be operated closer to the rated limits (e.g., lower TRMs and other offsets). • The relief available from redispatch is much more predictable and timely than through current processes -- should contribute to improved reliability.

  21. AFC Issues and Analysis • MISO calculates available flowgate capability (“AFC”) for firm and non-firm transmission service of various durations (hourly to yearly). • To assess the accuracy of the AFC values, the following figure shows the percent of the flowgate capability available based on the real-time flows in hours when a flowgate has a zero AFC. • The most frequent result is 0 percent. This occurs when the flow is equal to the limit or a TLR has been called on the flowgate. • In almost one fourth of cases, the portion of the flowgate that is unused is less than 10 percent. • However, more than 30 percent of the flowgate capability is physically unused in almost one half of the cases.

  22. Available Flowgate Capability During Hours with Zero Hourly Non-Firm AFC -- 2003

  23. AFC Issues and Analysis • We note that: • Some of the AFC values are calculated by other entities; and • The effect of understated AFCs is mitigated by the fact that the MISO will often approve hourly non-firm service in these hours. • Nonetheless, it is important to continue to improve the AFC values and make them as accurate an indicator of available capability as possible. • MISO made some improvements in the calculation of the hourly non-firm AFC values in 2003: • In May, MISO restored hourly AFC quantities associated with daily and longer-term reservations that were not scheduled by the scheduling deadline. • In December, MISO began using the State Estimator information to improve their short-term AFC models. • Based on our review, these improvements have not resolved these issues. • Hence, we recommend the MISO fully utilized the state estimator results and continue to investigate other improvements to improve the accuracy of the AFC values.

  24. Market Power Analysis • The report summarizes the pivotal supplier analysis supporting the recently filed market power mitigation measures. • Market power concerns in electricity markets are typically the result of locational market. • Locational market power arises when transmission constraints are binding, preventing adequate competition and giving rise to potential market power. • This market power is frequently related to a supplier that becomes “pivotal”. A supplier is pivotal when a transmission constraint cannot be managed without its resources. • The analysis in this section shows that a number of MISO’s flowgates have at least one pivotal supplier. • Of the flowgates exhibit a one or more pivotal suppliers, generally only flowgates affecting flows into or within WUMS are frequently congested. • The market power issues raised by these results will be addressed by the Midwest ISO’s mitigation measures.

  25. Summary of Market Developments • GridAmerica began operations October 2003. • Development of Day 2 market rules continued during 2003. • The tariff was filed on March 31, 2004. • Day 2 markets are now scheduled to begin December 2004. • The Day 2 markets will be initially composed of day-ahead and real-time energy markets, including a real-time pricing provision to set energy prices efficiently when the market is in a shortage. • Continued development of the markets after this initial implementation will be important, including: • Operating reserve and regulation markets; and • Long-term resource adequacy provisions.

  26. Summary of Market Developments • A Joint Operating Agreement with PJM was filed in December 2003. • This agreement provides the basis for the market-to-market coordination to resolve serious issues associated with the electrical interactions between the two markets. • Work is underway to develop the software to implement the market-to-market coordination provisions, which are essential to implement as part of the MISO’s Day 2 markets. • The agreement is also expected to improve emergency protocols, system planning, and market monitoring between PJM and MISO. • As the SPP develops its RTO markets, similar coordination provisions will be needed with SPP.

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